President’s eMessage, December 2018: The Cost of Doing Business

I have talked so much this year about people.  Our patients are why we practice the wonderful profession of dentistry.  The relationships we establish with our patients, staff, referring doctors, allied health care professionals, and community business people are also a rewarding part of the practice of dentistry.  I look forward to coming to my office every day, anticipating delivering the surgical specialty care that I was trained to perform. As a small businessman, personally an S corporation, the reality of the practice of dentistry is an income versus expense equation that presents itself each day.  The cost of doing business is rising, and it continues to squeeze the margin a dentist can realize leading to a competitive salary to support the efforts of today’s dentist.

Budgeting

Now is the time to begin a budgeting exercise.  It has been helpful for me to have been involved in the Finance Committee at the SCCDS and also to have served as Treasurer.  Income must exceed expenses or critical practice management decisions must be made. If possible, try to make economies-of-scale work to your advantage.  Joining a purchasing group like The Dentist’s Supply Company (TDSC) may help. Once financial statements are returned from your accountant, create a budget.  It can suffice as a template to follow as you move your practice forward into the new millennium. If short term expenses exceed income, you can respond to these financial challenges and hopefully stay on plan to insure a profitable fiscal year.  I have asked an experienced manager from the high-tech industry to guide me in my 2019 budgeting endeavor. Just managing the monthly fixed costs and variable costs, that includes supplies and equipment and staff salaries, can be very challenging.

Renting or Leasing Office Space

Rent cost in Silicon Valley is very high.  There are basically two types of rent-leasing structures available.  Landlords offer either a “Full-service” lease or a “Triple-net” lease.  Full-service is when the landlord provides all services for a leased property that may include water, garbage, utilities, insurance, maintenance and property tax.  The triple-net lease will require the tenant to pay for the classic “Building Insurance, Maintenance, and Property Taxes.” I don’t know how many full-service leases are available in Silicon Valley, as my lease has always been the triple-net variety.   Expect to pay $4 to $5 per square foot for a triple-net lease or even more if full-service leases are available. Having guidance from an attorney to review dental office leases can be helpful, for example, some leases will require a tenant to perform regular maintenance on heating, ventilation and air conditioning (HVAC) units and even pay for all costs pertaining to such units including the total cost of replacement of the unit.

Insurance

Insurance costs necessary to run a dental practice are staggering.  The minimum insurance policies required to practice dentistry safely today are workman’s compensation insurance, professional liability insurance, and office premises and liability insurance.  If you are in the process of paying off a practice loan or refinancing a large note, some financial institutions will require a term life insurance policy covering the value of the loan to insure they get paid.  You may be able to run your personal medical insurance through your office, so talk to your accountant about this. There are even small insurance policies that may be necessary. For example, digital x-ray sensors cost up to $7,500 per unit.  One might chose to insure those for replacement if damaged. Large capital equipment such as panoramic x-ray machines, cone beam CT scanners, lasers, CAD/CAM Zirconia scanning, grinding and milling units or intraoral digital cameras might require insurance protection to replace or repair wear-and-tear or damage.  Don’t forget that you also need disability insurance which needs to be paid for from your personal bank account, not the business, due to tax laws.

Leasing or Purchasing Capital Equipment

Industry seems to push technologic advancement as it applies to dental practice.  Our vendors that we meet at meetings, trade shows, and study clubs educate us on the innovative products that support the practice of dentistry.  Some of these products, like a cone beam CT scanning unit, can cost $100,000-$150,000. These pieces of capital equipment most likely will need to be financed by a bank.  Expect to pay 4% to 6% finance charges on capital equipment. Banks are now very aggressive regarding late charges and penalties. Read your contracts. Some institutions charge up to 10% late fees, and on a payment of $1500 per month, that is $150 per invoice.  Talk to a financial advisor regarding the risks and benefits of leasing versus purchasing dental equipment or making large leasehold office improvements such as office remodels.

Technology Costs

So you thought going paperless, wireless and digital would move you into the new millennium, where all of our professional colleagues are practicing?  It is very expensive to do so! I have found that an office computer system has a three to five year lifespan. I have updated my office computer systems every five years with new personal desktop computers.  Servers seem to have a longer lifespan, although adding digital and cone-beam CT technology will require much more server capacity. I have both leased and purchased computer systems during my 19 year practice lifetime.  I have also used a computer support service that handles all software updates, cloud storage, virus protection, and emergency computer glitches that can cripple the operations of a dental practice with just the push of a button or the separation of a power cord.  Office software systems companies recommend support contracts that provide assistance in the operations of all software that support both the financial and technical daily operations of a computer driven practice. These support service contracts can be quite expensive.  If you are in the process of purchasing a practice with paper charts and chemically processed x-rays, be prepared for technology costs per month that will exceed your monthly rent.

Employee Benefits and Retirement Plans

Office employee benefits can include paid time-off usually provided for sickness or family emergency, medical insurance, and participation in an office individual retirement account plan (IRA) or 401(k).  The 401(k) plan makes it possible for an individual to save the government allocated $18,500 or $24,500 if you are over 50 years of age. A “Safe Harbor” provision allows an employer to increase their yearly contribution if employees receive 4% of their salary in retirement plan benefits.  Strict tax laws that change yearly must be followed, and a retirement plan administrator is required to handle these details. Retirement plan administrators charge $1800 or more per year. Your retirement funds must be held by a brokerage house or financial planning institution. Your funds are invested, hopefully diversified, in stock or bond funds based upon a risk profile that you choose.  Those advisors, Morgan Stanley for example, charge a yearly fee of up to 6% of your retirement plan for investment management. Employee benefits such as paid time-off, vacation pay, and medical insurance coverage may be necessary to recruit quality staff away from other employment opportunities that are possible in Silicon Valley. These benefits can be quite costly to a small dental practice.

Bookkeeping and Accounting

The approximate cost of a dental accounting service is $400-500 per month.  This service is essential as they keep us up-to-date on all new tax laws, help depreciate capital equipment, and advise us as to business write-offs and tax credits.  You might also employ a bookkeeper that could cost $20 per hour to handle office accounts payable, prepare accounts receivable deposits, and manage office payroll via a payroll service.  Payroll services have programs that automatically tabulate government taxes (state and federal) including payroll taxes, and they will help you mange time-off and vacation pay based on your office policy.  These services run $100-$125 per pay period.

Conclusion

The cost of doing business is heavily weighted by these internal forces that affect the daily practice of dentistry; the discussion of the external forces that affect our practices will require another paper.  Being the leadership “junkie” that I am, I am a huge advocate for leadership development that takes young dentists from safe beginners to successful practitioners. Leadership has certainly been my pathway to life-time learning.  Keep management issues at the top-of-the-list as you do the great work that you do for your patients and the community. Keen practice management will make it possible for us to continue the privilege of practicing dentistry for years to come.  Leadership and management certainly go hand-in-hand!

 

Ned L. Nix, DDS, MA

President SCCDS

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